Is Capital Gains Tax payable when I sell my primary residence?

Is Capital Gains Tax payable when I sell my primary residence?

The first two important factors to establish CGT liability are:

Are you a South African citizen and

Is the house is your primary residential home. In effect capital gains tax is income tax that has to be paid on any capital gain made. Capital gains tax came into effect on 1 October 2001, and it is therefore good that you have an appraisal of your property for this date. That will help to determine the base cost of the property.

Firstly remember that income tax is applicable to the disposal (removal, alienation and sale) of assets on or after 1 October 2001, and any capital gain realised through such a disposal of assets will be subject to income tax, unless it’s specifically excluded. If any capital gain was therefore made on the sale of your property, CGT will be imposed.

However, part of the capital gain is included in the tax payer’s taxable income for that tax year. In the context of the sale of a house, the capital gain will be the difference between the yield (the amount gained by the sale of the property) and the base cost (the amount paid when the property was bought.)

The Income Tax Act however specifies some exceptions, specifically if the house that was sold is your primary home. The Income Tax Act defines a ‘primary home’ as a home -

i)

In which a natural person or a special trust holds an interest; and

ii)

In which that person or a beneficiary of that special trust, or a spouse of that person or beneficiary usually lived in as his/her main home and which was mainly used for domestic purposes.

The base cost of an asset then needs to be established and the Income Tax Act provides the following guidelines and determines that base cost is any cost directly incurred:

For the acquisition of an asset;

Direct costs towards the acquisition and sale of an asset, for example for the house/ primary home, the following all adds up to providing the base costs:

Costs for appraisal of the asset to determine the capital gains or losses;

Improvements of an asset; for example extensions and improvements that are still visible at the time of the sale of the property; and

Tax on added value – where it is raised but not recovered as input tax for purposes of added value.

Then the most important deduction furthermore is the exclusion of the first R2,000.000 capital gain on a primary home of capital gains tax. That means, the first R2 million “profit” made on the sale is not taxable as long as the property qualifies as your Primary residence. Note however that where a part of the primary property is used for business purposes that part of the property will however be subject to capital gains tax. If a second home, holiday home or timeshare is sold for profit, the R2,000,000 exclusion is not applicable because it will then not qualify as a primary home.

So, to determine if you will have to pay any capital gains tax, one will have to do the following calculations:

Primary home bought for R1 million, sold for R3,9 million:

Base cost of the primary property:

Appraisal on 1 October 2001

R1,000,000.00

Appraisal fee charged by the valuator

R5,000.00

Improvements

R250,000.00

R1 255,000.00

Capital gain calculations:

Yield

R3,900,000.00

Minus Base Cost

(R1,255,000.00)

Gain

R2,645,000.00

Minus Primary home exclusion

(R2,000,000.00)

Capital gain

R645,000.00

Taxable capital gain calculations:

Capital gain

R645,000.00

Minus annual exclusion

(R30,000.00)

Nett capital gain

R615,000.00

Taxable capital gain at 33.3% per year on R366,000.00

R204 795.00 – NOTE this amount will then also be affected by your normal income tax rate and deductions

The above is a basic calculation that indicates that capital gains tax may be payable. This is just an example and please bear in mind that every calculation is different so the above is not a hard and fast way to calculate the liability.

These calculations can become quite complex, and it is therefore very important that you consult a tax specialist to assist you with more detailed calculations, seeing as circumstances can differ substantially from case to case.